YOUR COMPANY IS LOOKING FOR A SALE LEASEBACK FINANCE SOLUTION!
HOW A EQUIPMENT FINANCE SALE LEASEBACK WORKS!
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A Sale leaseback financing strategy is one of the more unique methods of replenishing your capital and cash flow. There are some great consequences of this business finance strategy, as well as some important considerations. Let's dig in.
WHY WOULD A COMPANY DO A SALE LEASEBACK?
Not all Canadian business owners and financial managers are aware of this somewhat unique strategy. At its essence, it's very simple. Your firm should consider leasebacks if you can utilize the cash proceeds for the transaction to run and grow your business. The transaction does not add debt to the balance sheet and adds valuable working capital to your business for refinancing or growth needs.
HOW DOES A SALE LEASEBACK WORK?
You are taking an asset you own and in effect ' selling' it back to the equipment financing company or commercial finance firm for a period of time via the ' equipment lease '.That entity then ' leases' it back to you via one of three finance vehicles:
Capital Lease
Loan/Bridge Loan
Operating Lease
5 KEY REASONS TO CONSIDERING LEASE BACK FINANCE SOLUTIONS
What then are the 5 reasons that the business owner/manager rationalizes to consider such a transaction. They are as follows:
1. A need for working capital
2. A quicker way to raise cash as opposed to taking on new debt or considering additional equity
3. The unique need to both still use the asset in question as well as to maximize its value to your firm
4. To manage certain debt/equity relationships on your balance sheet
5. Maximizing your ' R O A ‘- (return on assets)
CONSEQUENCES AND CONSIDERATIONS THE THE LEASE BACK
As we noted our described financing for sale-leasebacks has both some consequences and considerations. Naturally the equipment leasing company or commercial finance firm must properly document the transaction from a legal and contract perspective. That's actually a fairly simple matter.
ENSURE YOU UNDERSTAND THE ACCOUNTING AND TAX ISSUES AROUND THE LEASING BACK OF ASSETS / IS A SALE LEAESEBACK TAXABLE?
But one other consideration is the accounting treatment of your transaction, often overlooked in the early stages of the owner/managers consideration of a leaseback. You need to discuss, and consider the balance sheet and income statement effects of treating the lease back as either a capital lease or an operating lease.
For example, it might be recommended that you do an ' operating lease ' - in that case your income statement needs to reflect either the gain or loss on the value of the asset or assets in question. (Yes Virginia, some assets actually increase in value on occasion).
Company-owned real estate is a good example. More often than not we recommend Capital (lease to own) Leasing strategies when implementing a sale leaseback, if only because the accounting, tax and cash flow reporting consequences seem to be a bit straighter forward.
THE CASH FLOW STATEMENT
We haven’t mentioned your firms ' CASH FLOW STATEMENT ' when it comes to a sale leaseback, but typically your accountant will recommend (or insist!) that your cash flow statement show the leaseback as a Financing inflow on your financials.
KEY BENEFITS AND OTHER ISSUES
People are always going to have ' questions ' and ' issues' with a sale leaseback. This is everything from a lender viewing it negatively as a cash grab, your accountant raising tax, balance sheet and reporting issues, etc. Nonetheless, it’s a proven and often used financing strategy to grow your business and enhance cash flow while keeping an asset you want to keep, or need for that matter.
An effective lease back solution will enhance your working capital or allow you to refinance when needed, while still, of course, maintaining full use of the asset. New equipment that is paid for and unencumbered has good potential for refinance, as well as, of course, other existing assets that have value.
CONCLUSION
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in the ' truth or consequences' aspect of small business leaseback transaction financing.
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Stan Prokop
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